Mortality Improvement for Canadian Valuation and MCCSR (May, 2011)
This article describes enhancements in AXIS that can be used to incorporate mortality improvement according to recent revisions made to the Canadian Institute of Actuaries’ (CIA’s) Standards of Practice and the Office of the Superintendent of Financial Institutions (OSFI’s) Minimum Continuing Capital and Surplus Requirements (MCCSR) Guideline. The enhancements described in this article are in the Regular life module, Universal life module, Participating life module and Annuity module.
CIA Research Paper and Standards of Practice
On September 23, 2010, the Committee on Life Insurance Financial Reporting released a research paper that “provided support for an updated promulgation for mortality improvement with respect to the valuation of insurance and annuity business, and for changes in the range of margins in the Standards of Practice.” Subsequently the Actuarial Standards Board proposed to promulgate a change to subsection 2350 in the Standards of Practice that would limit the mortality improvement used in determining the insurance contract liability. This change is expected to be effective on October 15, 2011.
In AXIS version 12.8.02.001 (for Modules other than Annuity) and AXIS version 2012.01.03 (for Annuity Module), the Mortality improvement MAD table was added in each of the Reserve sections. The table is used when Reserve revaluation is performed. The table works with the Projection scale table, the Mort Improve (from fin year) table (since AXIS version 2015.01.01), and the Mort Improve att age by fin yr table (since 2014.08.01). One of these tables can be selected in the mortality improvement table field (since 2015.05.01, the recommended approach) or inside a Compound mortality table as an Adjustment table.
The option between integral MI duration and continuous MI duration in the Projection scale table allows the user to control the length of both padded and unpadded mortality improvements. Refer to Knowledge Base article 1602 "Mortality Projection Basis Options in Projection Scale Table" for additional information.
The values in the Projection scale table are considered best-estimate mortality improvement rates. After the Reserve recalculation date, the columns in the Mortality improvement MAD table will adjust the rates in the Projection scale table depending on the setting of the Define switch inside the Mortality improvement MAD table:
- 0 - Margins decrease the expected improvement; Do not apply column 2 to column 4
- 1 - Margins increase the expected improvement; Do not apply column 2 to column 4
- 2 - Margins decrease the expected improvement; Final improvement is capped by column 2 and column 4
- 3 - Margins increase the expected improvement; Final improvement is floored by column 2 and column 4
Column 1 can be used to enter margins as percentages of the projection scale rates. The direction of the margins will vary according to the Define switch. It’s up to the user to decide the direction of the margins that will increase the reserves.
Columns 2 and 4 can be used to specify upper or lower bounds that limit the final mortality improvement rates. The values in Column 3 can be used to limit the number of years of improvement from the Reserve recalculation date (i.e. 25 years).
Note that the Dynamic projection scale table can also work with the new Mortality improvement MAD table, provided that the Define switch is set to option 2 or option 3. Without the Mortality improvement MAD table, the values in the Dynamic projection scale table will apply to the mortality rates up to the Reserve recalculation date (i.e. no improvement will be made after the Reserve recalculation date). With the Mortality improvement MAD table, the limits in Columns 2 and 4 will override the behaviour of the Dynamic projection scale table.
Revised MCCSR Guideline for 2011
On December 23, 2010, OSFI released the revised MCCSR Guideline for 2011. One of the changes was to “reverse the impact of decreases in policy liabilities due to recognition of future mortality improvement under planned changes to Standards 2350.06 and 2350.11 of the Canadian Institute of Actuaries.”
In the Regular life module, Universal life module and Participating life module, in the June release of AXIS (version 12.8.03.001), the new switch “Mortality improvement” has been added in each of the Required fund sections. When the new switch is set to “1 - Exclude future mortality improvement in valuation assumption”, the reserves used in calculating MCCSR required capital components will exclude mortality improvement after the Reserve recalculation date. This option will only apply when Column 2 and Column 4 of the Mortality improvement MAD table in the corresponding Reserve section are defined as maximums (Define option 2).
The new Calendar year row “Reserve used for required capital” will be added in the Required Surplus Basis Category Report. This row will show the policy premium method reserves excluding future mortality improvement. Other rows in the Required Surplus Basis reports such as lapse risk component and mortality component will also be calculated by excluding future mortality improvement.
The net decrease in the reserves resulting from the recognition of future mortality improvement will reduce Tier 1 available capital at the Higher level. This amount can be found in the Required Surplus Category Report.
If you have questions on any of these revisions and how AXIS supports Reserves and Required surplus calculations, please contact us through our website client portal (www.ggy.com/Client/).